Full recovery: FSCS closes the book on the 2008 banking crisis
Twelve years on, we've just received the final recovery payment from the 2008 banking crisis through the administration of Heritable Bank. As we wrap up our involvement in this extraordinary period in the industry's history, we explain the vital role our recoveries process plays.
The financial crisis of 2008 saw the unthinkable happen: long-established banks that were household names collapsed overnight, causing chaos for their customers.
FSCS protected these customers by transferring their accounts or paying them compensation. What may be less well-known though, is the work we did behind the scenes over the years to claim back, or 'recover', money from the failed banks.
We recently received the final recovery payment from the banking crisis through the administration of Heritable Bank, so it seems a fitting time to put the spotlight on our recoveries process.
What is a recovery?
A recovery is a legal claim that FSCS makes to get back the money we pay in compensation to our customers. A crucial part of our job is to recover money from failed firms, and any relevant third parties, wherever possible.
Once we've paid a customer compensation, their legal rights are transferred to FSCS. This allows us to try and get back some, or all, of the costs of compensation. Our customers benefit as it means they get their money back much sooner through FSCS than if they had to wait for the full insolvency process to complete. It also benefits our levy payers, as the recoveries we make go towards reducing the levy.
How do recoveries help to reduce the levy?
The banking crisis illustrates how recoveries can cut down how much our levypayers contribute. During the crisis, we had to borrow a large amount of money from HM Treasury so we could pay compensation quickly and not leave customers out of pocket.
The levy had to fund the interest on this loan while we made recoveries. The money we recovered from the failed banks paid back the vast majority of the money we borrowed:
- We paid out £20.9bn in compensation as a result of the crisis.
- We recovered £20bn from the failed banks.
- The levy covered the £0.9bn shortfall and £3.5bn interest.
Now that the loan has been repaid in full, the total levy for deposits firms is £17m this year – less than 2 per cent of the £861m peak in 2014/15.
In Autumn 2008, in the midst of the financial crisis, five deposit institutions collapsed affecting more than 4 million retail bank accounts in the UK. The most prominent were Bradford & Bingley and Icesave (the UK internet branch of Landsbanki, an Icelandic bank).
FSCS played a pivotal role in protecting the customers of those banks. From the seamless transfer of the accounts of 2.5m Bradford & Bingley customers to Santander – with no changes to their account details or terms – to the online claims process developed specifically for more than 200,000 Icesave customers.
The 2009 House of Commons Treasury Committee report 'Banking Crisis: dealing with the failure of the UK banks' recognised the work we did throughout the crisis: 'The FSCS deserves praise for the way in which it fundamentally increased its response to the unprecedented compensation claims arising from the default of five banks in just a few months. We are particularly impressed with the variety of innovative solutions deployed by the FSCS to suit the particular challenges facing them.'
Read the finer details of our recoveries process.